Case No. 2 : On Demand and elasticities in the Higher Education industry.

Higher education has long been provided for by the governments at subsidized rates. But increasingly private players have entered this industry and are operating as profit seeking entities. With this drastic change in outlook the issue of pricing in this industry- that of tuition fee, is becoming a very important one. Mr. Harry Sabarwal president of Prime Institute of Higher Learning is very pensive because his institution has recorded a loss in the previous financial year. Equipped with MBA talent, he assigned to his subordinates a number of tasks. The foremost task was to assess the impact of a10% increase in tuition fees for the next year given that the present fees are at Rs.600,000 per year for the flagship MBA academic programme a two year Masters programme in Business Administration. Prior research studies indicate that the price elasticity of demand for this programme was 1.3. With the Government giving signals of opening up higher education to Educational Institutions rooted outside the country, domestic institutions are going aggressive in the admission of foreign students to the programme. The Prime Institute of Higher Learning has such students too about 25% of the total of 1000 students in the programme. Past studies indicate that price elasticity of demand of such students is slightly higher at -1.7. Institutes of higher education are also required to admit students from the Schedule Caste and Tribes and these account for 25% of the students. This group however has a very high price elasticity of demand estimated at -3.5. In many years during the past this reservation had not been filled up. Dr. Sabarwal is also contemplating setting up a PR cell to be run by a PR consultant who is quoting a onetime fee of Rs.800,000. That admission to this programme is sensitive to promotional and awareness campaigns is evident and

he assigns an elasticity of +1.5 to this factor. He is targeting to increase the strength of students admitted by 25% to start with and increase it by 100% in 3 years.

Questions: 1. Comment on the reliability of the elasticity estimates given in the case. 2. Assuming the elasticities to be as given, evaluate the outcome of Mr. Sabarwals strategy on price and promotion. You are required to compute the contribution to revenue due to the strategies and assess the extent of losses that can be written off. 3. Specify a demand function to estimate the demand for the Prime Institute of Higher learning, from which the elasticities could be derived.